Waiting For A Market Pullback

Reader Question

I have been researching investment advisors such as Wealthfront, Covestor, Betterment, etc.. Thanks for pointing out the Vangaurd funds that compete with these companies as well. My question: when is the best time to invest in any of the above mentioned, should I wait for a market correction/pullback, which could occur in the near to intermediate future? Waiting for such a pullback would certainly help capture any advance that follows, and place my investment on better footing. Is this a sound approach or should I be looking at this from a longer term view? Sincerely, db

My Reply

The short answer is that you should figure out your investment strategy based on your particular need and ability to take on investment risk and then invest whatever cash you have earmarked for investment immediately.

It is utterly impossible to predict what will happen in the stock or bond market in the short term and there's only scant evidence that it's possible to predict what will happen in the long term, long term being well over 10 years. If you're interested, you can check out  my forecast of next 20 years of market returns -- they are substantially the same now as in March when I made that post (except long-term bonds are now priced for even lower returns).

As for the market pullback, it falls squarely in that utterly impossible to predict category. It could certainly happen and you'll be happy you waited or we could be looking at a 20% move up in prices before the end of year which will have you kicking yourself if you miss out. Nobody has the slightest clue as to whether it will happen but since it's a binary outcome event about half of the millions of investors making short-term predictions will end up looking like geniuses and half like idiots. Too bad there's no way of knowing which half will be which ahead of time.

My favortie example of the general cluelessness of active managers who try to time the market is the case of John Hussman of Hussman Funds. Here's a professional economist turned investment manager who correctly predicted the bull market of 1990s, the dot-com stock market bubble, and the housing bubble. If anoyone could beat the market, it must be him, right? For a while it was. From his flagship's Strategic Growth Fund's inception in 2000 till the 2008 plunge his fund doubled the investor's money, beating virtually every other diversified stock or bond fund. In the midst of 2008 turmoil, Hussman even managed to predict a possible drop to 600s level in S&P 500 which he called possible investing opportunity of a lifetime. Incredibly, he got this prediction right as well as S&P 500 did drop to below 670 early in March of 2009!

What did Hussman do? By early 2009 for whatever reason (you can read his commentary if you are interested in his thinking) Hussman decided that the market will plunge lower still and then never waivered from this new-found bearish conviction. Virtually every weekly commentary he has published since early 2009 outlines his reasons for why the market should pull back and pull back a lot and why he will continue to wait for this pullback. Even when these pullbacks did happen, such as during the summers of 2010 and 2011 and 2012, Hussman decided to sit them out waiting for (and not getting) even deeper pullbacks.

As the result Hussman proceeded to lose his investors over 10% since the 2009 market bottom while virtually every other stock or bond investment has had handsome returns of anywhere between 20% for diversified bond funds to well over 100% for US stocks in the same time period.

To make matters worse Hussman's outstanding pre-2009 record became the talk of investing community attracting substantial new inflows into his funds in 2009-2011, just as his returns started to fizzle. So despite clearly being one of the more knowledgeable, most prescient (with outstanding track of economic predictions), and one of the most open (he publishes a detailed free weekly newsletter) investment managers in the world his flagship fund trails virtually every index investment out there -- stocks, bonds, cash, REITs, commodities, domestic, international, you name it -- for the last 10 years! That means that far more investors lost money (either in absolute terms or at least relative to the market) with Hussman than those who made it -- the latter being a small minority who lucked out by investing with Hussman from his start in 2000.

Why am beating up on Hussman here? Only to convey the point of how profoundly difficult it is to correctly predict short-term market movements. Here we have a genuine economic and investment superstar enjoying an enviable streak of correct market calls, only to make one crucial mistake that causes him to underperform virtually every other possible investment over a whole decade! It is very, very, very, very difficult to beat a diversified, low-cost stock and bond investing strategy in the long term by trying to guess market movements. Very few (more like none, but I'm being generous) active investors appreciate this simple point. There's not nearly enough respect or appreciation for the market or index investments that mirror the market at lowest possible cost.

If there were attractive safe alternatives (e.g. bonds) to stock investments now, then you could make a good case for sticking with a conservative strategy and ignoring stocks altogether. It'd be a win-win whether or not the stock pullback took place. Unfortunately bonds and cash are priced for putrid returns, in all likelyhood more putrid that the stocks (see my 20-year forecast). And as Hussman's investors found out, there's no guarantee that the pullback will come soon or, even more importantly, that you will be lucky enough to buy into the pullback at the right time and not miss the entire opportunity by being too greedy and waiting for still bigger pullback. By waiting for the pullback you all but ensure losing money to inflation waiting for something that may or may not happen and that you may or may not catch even if it does happen. It's certainly better to wait for a pullback from today's stock levels than from early 2009 levels as Hussman chose to do, but it's still likely to be a losing strategy.

So my advice, again, is to figure what kind of investment risk level you need to take and are able to psychologically tolerate, go all in (preferably with Vanguard, but Betterment or Wealthfront aren't too bad either), and tune out from all market news. Just keep saving and keep channeling those savings into your selected invesments during both bull and, especially, bear markets. You'll feel horrible during the market plunges -- which will surely happen -- but in, say, 30 years you'll almost certainly be happy that you rode that rollercoaster and didn't try to get off half-way.